Borrowing rates go over our heads

Nearly three-quarters of mortgage holders do not understand the full effects of interest rate rises, according to a survey from credit report website CreditExpert.co.uk.

When asked what impact a 0.5 per cent rise would have on monthly payments on a £100,000 interest-only mortgage, seven in 10 people gave the wrong answer. Nearly a fifth of respondents guessed their payments would rise by twice the level that they actually would. A similar number thought they would increase by no more than £10; the correct answer was around £40.

The survey also revealed widespread ignorance over personal finance terms. For example, 77 per cent of people questioned were unable to define "annual percentage rate" (APR) – the interest rate and cost of any loan.

"The lack of understanding of key phrases and the effect of rate changes is worrying," said Jim Hodgkins, managing director of CreditExpert. "It's important for people to be familiar with standard financial terms and stay on top of changes that affect their personal finances, so they can make the best possible choices."